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You may know a thing or two about Blackjack—or Vingt-et-un, as the French, and supposed creators of the game, call it. But even if you’ve never played the game, or seen the movie 21, you’re likely aware that people have developed clever methods for shifting the odds to favor the player over the casino. You also probably realize that these methods were developed through systematic testing. Having written a paper on card-counting methods in graduate school, I’ve reviewed the results of many of these tests, and I can tell you that some methods are clearly more successful than others. Needless to say, the strategies that work best are the ones most often used by professional card counters.

Since I’m somewhat of a betting man, I’ll wager that if you’re reading this, you’re already an investor and probably have a large percentage of your net worth in the stock market. Perhaps you even actively trade stocks in your own accounts instead of using mutual funds or ETFs. So my questions to you are: 1. Is your stock picking strategy good? And 2. How do you know?

Maybe you’ve been actively trading your clearly defined strategy for over five years, have been keeping diligent trading records and are confident when you say that you’ve outperformed your benchmark by X% over that time frame. (Remember, if you can’t beat your benchmark, what’s the point?) Or maybe you don’t have a good strategy because either you can’t really explain it or it doesn’t honestly beat the benchmark. The bottom line is you need to know what works and what doesn’t, right?

So how do you do that? With backtesting! Backtesting is the process of assessing a stock-picking strategy by applying it to past data. The important facet about backtesting is that it actually shows you how a strategy would have performed if it had existed in the past. Backtesting also allows you to see what works and what doesn’t—without actually risking your wallet. Of course if you were patient enough, you could paper trade for years to see if you had something and if you didn’t, you could develop another strategy and paper trade for another several years. That might work in the thousand-year lifespan of, say, an elf, but, for humans, life’s too short.

To do this accurately, you need a tool that replicates the data within the time frame in question. You’re going to need the ability to buy and sell stocks that no longer exist, access to historical financial statements and prices, the ability to handle spin-offs and stock splits, and numerous other absolutely necessary features. You might say to yourself, “Nothing like that exists” or “Only institutional and professional money managers have access to that information.” But I’m here to tell you that your thoughts are mistaken. This sort of tool does indeed exist for the individual investor, and it’s called the Zacks Research Wizard.

With the Research Wizard you can develop and backtest your investment strategies on over 10 years of data, which includes information from corporate reports, analyst earnings estimates, sales estimates and recommendations, and stock prices. You’ll also be able to test combination strategies if you have multiple ideas.

Do you like to trade every week or are you more tax sensitive and trade monthly, quarterly or even less frequently? No problem. With the Research Wizard you can change your trading frequency or holding periods to fit your trading style.

However, to truly see if your strategy is worthwhile, you’ll need to compete against a benchmark. RW offers you the opportunity to test your strategies against a few different benchmarks. You can actually discover what does and doesn’t work, based on historical data. You will be able to select strategies proven to work over time and you can feel confident and assured in your investment decisions.

Here’s an example keeping with the casino theme. Using RW, I built a strategy by selecting only those companies whose principal business is leisure services, specifically casino and gaming. My strategy also included only those stocks which are highly or moderately rated per the Zacks Rank. I then selected the five with the best Cash Flow-to-Price ratio, which measures your purchase value of cash generated from operations. Since you’ll want high cash flows at a lower price, a high Cash Flow/ Price ratio is better.

This strategy was then backtested from 2001 – 2010 and the results show an average annual return of 34.5% compared to the S&P 500’s 3.4%. Since this strategy, on average, outperformed the benchmark by 30+% per year, I’m pretty confident that I’ve got something here.

Here are the 5 stocks this strategy selected today (12/8/11):

– Bally Technologies, Inc.

Based in Vegas, Bally Technologies operates as a diversified gaming company, whish designs, manufactures, operates, and distributes gaming devices and systems. This company has a Cash Flow/Price ratio of 11%, which means for every dollar you pay for the stock, the firm is generating 11 cents in cash from operations.

This company operates a hotel/casino facility in Reno. The stock of this gaming company remains a fairly good buy based on its 14% Cash Flow/Price ratio.

– Multimedia Games Inc.

Multimedia Games designs, manufactures, distributes, and maintains gaming machines and video lottery terminals. This company is rated “strong buy” on its Zacks Rank and also has a very good Cash Flow/Price ratio of 27%.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at https://at.zacks.com/?id=5518.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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